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ROLE, POWER AND FUNTION OF AUTHORITY OF ADVANCE RULING

ROLE, POWER AND FUNTION OF

AUTHORITY OF ADVANCE RULING

TAXATION LAW
SUBMITTED TO: Mr. G.P. PANDEY

SUBMITTED BY:

EESHA GUPTA

ROLL NO. 330 (4TH YEAR)

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ACKNOWLEDGEMENT
Before starting this project I would like to thank my faculty, Mr G.P. Pandey for giving me such
a wonderful topic to work on. The topic was really nice and I was very interested in doing this
project. I would also like to thank University library’s librarian who constantly guided in
choosing the appropriate books for reference and also my friends and guardians.

Thanking You,

Eesha Gupta

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M ETHODOLOGY
(1) Aim and Objective

The aim of the project is to study and analyze the laws relating to Advance Rulings.

(2) Scope and Limitation

The scope of the project extends to study of laws relating to Advance rulings. I tried to explain the present
day position of laws in this context while discussing the various provisions of law regarding the same.
The project is based on doctrinal method of research as field work on this topic is quite impossible. I have
mainly used the textbooks relating to the subject and the bare act. Moreover internet is used to obtain web
articles and write ups and bare acts. Due to lack of expertise and time constraints, I had to use secondary
sources to do the research work which is the limitation of this project.

(4) Chapterisation

I have divided the project into various chapters each dealing with different aspects of the topic. In the
initial chapters, I have discussed elaborately, the meaning of construction and its necessity. Lastly, I have
concluded the topic by summarizing the highlighting aspects of the Taxation in Advance Rulings.

(5) Sources of Data

 Books
 Bare Act
 Journals
(6) Method of Writing

The method of writing followed in this project is both analytical and descriptive.

(7) Mode of Citation

Uniform mode of citation has been followed hinting at the Harvard Law School’s Bluebook for
this project.

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CONTENTS

1. INTRODUCTION....................................................................................................................................5

2. ADVANCE RULINGS UNDER INDIAN LEGAL SYSTEM ............................................................6

3. CREATION OF AUTHORITY OF ADVANCE RULINGS………………………………..….........6

4. SALIENT FEATURES............................................................................................................................6

5. UNIQUENESS OF INDIAN LEGAL SYSTEM...................................................................................8

6. COMPOSITION OF AUTHORITY……………………......................................................................9

7. FUNCTIONS AS A WHOLE…………………………………………………..……………………..10

8. WHO CAN SEEK ADVANCE RULINGS..........................................................................................10

9. POWER TO MAKE RULES ………………………….……………………………………..………11

10. ADVANTAGES UNDER THIS SCHEME…………………………………………………………13

11. CONCLUSION……………………………………………………………………………………….15

12. BIBLIOGRAPHY……………………………………………………………………………………16

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INTRODUCTION

In the present era of globalization international trade is the driving force of the modern world.
There is a growing realization that no economy can grow and flourish in isolation. There is also
an increasing awareness that good tax laws and good tax administration are essential for all the
modern economies. The government of India has entered into tax treaties with various foreign
countries to provide stability and certainty to tax laws, governing collaborators and their
counterparts in India.

In the view of complexity of modern tax laws, taxpayers would like to be sure of the tax
implications of their proposed transactions and in that context the facility of advance rulings on
the interpretation of tax laws would go along way in making up their mind for investment in a
particular country. Advance ruling has been internationally recognized as “a more or less binding
statement from the revenue authorities upon the voluntary request of a private person, concerning
the treatment and consequences of one or a series of contemplated future actions or transactions.

In India the need for such a system was recognized since 1970’s by certain communities’ viz. the
Wanchoo committee, the Choksi committee and the Achelliah Committee; as appointed by the
government from time to time.

The office for advance ruling was created by the finance act, 1993 under the income tax act. The
substantive provision of law relating to this authority are contained in sections 245 N to 245V of
the IIT act ( Chapter XIX-B) and the procedure is spelt out in income tax rules, 1962 – Rules
44E and 44F and also the “ Authority for advance ruling” ( procedure) rules, 1996” notified
under the powers vested in the authority u\s 245V.

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Advance rulings under the Indian legal system

Under the scheme, as now enacted, it has been decided to entrust the power of giving advance
ruling to an independent adjudicatory body and to ensure body and to ensure further that the
procedure is simple, inexpensive, expeditious and authoritative. Accordingly, a high level body
headed by a retire judge of the supreme court has been set up which is empowered to issue which
are binding both on the income tax department and the applicant. It has two other members
drawn from the top of the revenue and legal hierarchy in the country. This authority is a quasi
judicial body having full powers of civil court under the income tax act to give its ruling in
respect of specific question of law or fact.

Concept of advance ruling and creation of authority for advance ruling:

Under the scheme, as now enacted, it has been decided to entrust the power of giving advance
rulings to an independent adjudicatory body and to ensure further that the procedure is simple,
inexpensive, expeditious and authoritative. Accordingly, a high level body headed by a retired
Judge of the Supreme Court has been set up which is empowered to issue rulings which are
binding both on the Income-tax Department and the applicant. It has two other members
drawn from the top of the revenue and legal hierarchy in the country. This Authority is a quasi-
judicial body having full powers of a civil court under the Income-tax Act to give its rulings in
respect of specific questions of law or fact.

Salient features:—

a. Available only for Income-tax:—

The procedure of advance ruling is available only under the Income-tax Act, 1961.

b. Must relate to a transaction entered into or proposed to be entered into by the applicant: -

The advance ruling is to be given on questions specified in relation to such a transaction by the
applicant.

c. Questions on which ruling can be sought:—

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i. Even though the word used in the definition is the word "question", it is clear that the non-
resident can raise more than one question in one application. This has been made amply clear by
Column No. 8 of the form of application for obtaining an advance ruling (Form No. 34C)

ii. Though the word "question" is unqualified, it is only proper to read it as a reference to
questions of law or fact, pertaining to the income tax liability of the non-resident qua the
transaction undertaken or proposed to be undertaken.

iii. The question may be on points of law as well as on fact; therefore, mixed questions of law
and fact can also be included in the application. The questions should be so drafted that each
question is capable of a brief answer. This may need breaking-up of complex question into two
or more simple questions.

iv. The questions should arise out of the statement of facts given with the application. No ruling
will be given on a purely hypothetical question. No question not specified in the application can
be urged. Normally a question is not allowed to be amended but in deserving cases the Authority
may allow amendment of one or more questions.

v. Subject to the limitations to be presently referred to, the question may relate to any aspect of
the non-resident's liability including international aspects and aspects governed by double tax
agreements. The questions may even cover aspects of allied laws that may have a bearing on tax
liability such as the law of contracts, the law of trusts and the like, but the question must have a
direct bearing, on and nexus with the interpretation of the Indian Income-tax Act.

d. Time limit for ruling:—

The Authority shall pronounce it advance ruling within 6 months of receipt of the application.

e. Binding nature of advance ruling:—

The effect of the ruling is stated to be limited to the parties appear before the authority and the
transaction in relation to which the ruling was given. This is because the ruling was rendered on
a set of facts before the Authority and can not be of general application.

Question precluded: Under section 245R, certain restrictions have been imposed on the
admissibility of an application, if the question concerned is pending before other authorities.

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According to it, the authority shall not allow an application where the question raised by the non-
resident applicant (or a resident applicant having transaction with a non-resident) is already
pending before any income-tax authority or appellate Tribunal or any court of law. Further, the
authority shall not allow the application where the question raised in it:—

i. involves determination of fair market value of any property; or

ii. it relates to a transaction or issue which is designed prima facie for the avoidance of income-
tax.

Procedure of application for advance ruling: An applicant desirous of obtaining an advance

ruling should apply to the Authority in the prescribed form stating the question on which the
ruling is sought. The application has to be made in quadruplicate in Form Nos:—

34C - applicable for a non-resident applicant

In some countries, the efficacy of an advance ruling is restricted to

34D - applicable for a resident having transactions with a non-resident The application is to be
accompanied by an account payee demand draft for 2,500 Indian rupees drawn in favour of the
Authority for Advance Rulings and made payable at New Delhi. The application may be
withdrawn within 30 days from the date of the application.

Binding on both parties:

The ruling pronounced by the authority is binding on both parties before it. Section 245S(1)
expresses the rule thus :

245S: Applicability of Advance Ruling:

(1) The advance ruling pronounced by the Authority under section 245R shall be binding
only: (a) on the applicant who had sought it; (b) in respect of the transaction in relation to which
the ruling had been sought; and (c) on the Commissioner, and the income-tax authorities
subordinate to him, in respect of the applicant and the said transaction. The effect of the ruling is,
under- standably, stated to be confined to the applicant who has sought it as well as the
Commissioner and the income-tax authority subordinate to him having jurisdiction over the

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case and that too only in relation to transaction for which advance ruling was sought. It may,
however, be stated that the Authority generally follows the ruling in other cases on materially
similar facts and, most certainly in other cases raising the same question of law, if any, which it
has decided. The rule here is different from the position in other countries where either the
taxpayer or the revenue or both are at liberty to accept the ruling or not.

Duration of the ruling

In India, the binding effect of the ruling is related to the transaction and not to a number of years.
The ruling would remain in force so long as the transaction continues and so long as there is no
change in law or facts on the basis of which the ruling was pronounced.

Uniqueness of the Indian system

Advance ruling system has been practiced in approximately 60 countries for the past four
decades. India is a comparatively late entrant. Today, advance rulings is becoming more and
more indispensable as trade and commerce are getting more global, and complex problems are
swamping the tax administration the world over.

It is recognized today that well executed advance ruling system will improve the perception of
the administration of the income tax laws in the eyes of the tax payers and the public.

In many ways the advance ruling system in India is unique and far more effective than in most
other countries. In most countries the advance rulings are given by the revenue officials with
different variations of the theme, and these rulings are mostly not binding, as they are not given
by judicial or quasi jus- judicial authority. However, in India like Denmark the rulings are
binding. In India the authority is a high level qausi judicial and independent statutory body
chaired by a retire judge of the supreme court. Since the rulings are binding on the applicant and
the income tax authorities they are quite effective in substantially eliminating long drawn out
litigation. Only in the cases where an aggrieved party chooses to exercise its constitutional right
to go writ to the high court or file a SLP before the Supreme court, do the issues take time to
resolve. Its also flows from the quasi judicial nature of the Indian AAR that the rulings, though
may not be treated as precedent, have a great persuasive value.

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Composition of the authority

The advance ruling in India is rendered by an authority constituted specifically for this purpose
known as the authority for advance rulings. Its consists of a chairman and two members. The
chairman is a retired judge of the supreme court. One of the members to be appointed is from the
Indian revenue service who is qualified to be a member of the CBDT, who may be referred to as
the revenue member. The other member is an officer of the Indian legal service, who is qualified
to be an additional secretary to the government of India and may be referred as the law member.
The salaries and allowance payable to, and the terms and conditions of the service of the
members have been prescribed by the government of India. The constitution of the authority is
such that it functions as an independent quasi judicial body deemed to be a civil court for the
purposes of section 195 of the code of criminal procedure, 1973.

Function as a whole

All the three members of the authority function as a body in disposing off the applications before
them. However section 245P makes it clear that o proceeding before the authority , or the
pronouncement of the advance ruling by authority, shall be requisitioned or shall be invalid on
the ground t merely of the existence of an vacancy or defect of the constitution of the authority.

Under rule 27 of AAR procedure rules, 1996 the proceeding of the authority has been laid down
as below:

27(1) when one or both of the members of the authority other than the chairman is unable to
discharge his functions owing to the absence, illness or any other cause or in the event of
occurrence of any vacancy or vacancies in the offices of the members and the case cannot be
adjourned for any reason, the chairman alone or the chairman and the remaining member may be
function as the authority.

(2) subject to the provision of sub rule (3) in case there is difference of opinion among the
members hearing an application the opinion of the majority of the members shall b prevail and
orders of the authority shall be expressed in terms of the views of the majority view may record
his reasons separately.

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(3)Where the chairman and the other member hear a case under sub rule
(1) and are divided in their opinion, the opinion of the chairman shall prevail.

Powers of the authority

Section 245U deals with the powers of the authority, sub section (1) provides that for the purpose
of excreting its power, the authority shall have all the powers of a civil court under the code of
civil procedure, 1908 as are refer to in section 131 of the income tax act, when trying a suit in
respect of the following matters, namely:

(a) Discovery and inspection;

(b) Enforcing the attendance of any person, including any officer of a banking company
and examining g him an oath;
(c) Compiling the production of books of accounts and other documents; and
(d) Issuing commissions.

Under sub section (2) the authority shall be deemed to be a civil court for the purposes of section
195 of the code of criminal procedure. Section 195 deals with e the prosecution for the contempt
of lawful authority of public servants, for offences against public justice and for the offences
relating to documents given in accordance with evidence. But it would not be deemed to be a
court for the purposes of the chapter XXVI of the code of criminal procedure which deals with
provisions as to offences affecting the administration of justice. Further, every proceeding before
the authority shall be deemed to be a judicial proceeding within the meaning of sections 193 and
228 and for the purpose of the section of 196 of the IPC. Section 193 deals with punishment for
false evidence.

Power to make rules

Section 245V empowers the authority to frame rules to regulate its own procedure in all matters
arising out of the exercise of its powers under the act. In accordance with the powers vested in
the authority vide this section, the authority for advance rulings rules, 1996 have been
promulgated and the same have been notified in the gazette of India vide notification. These
procedure rules are called AAR rules, 1996.

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Secretariat of the authority

Sub section 4 of the section 245O of the act empowers the central government to provide the
authority with such officers and staff as may be necessary for the efficient exercise of the powers
of the authority under the act. The head of the of the establishment of the authority is its
secretary, who is an officer of the rank of a commissioner of income tax (CIT) assisted by two
directors or deputy secretataries of the rank of additional or joint commissioners of income tax.
These officers look after the technical as well administrative requirements of the authority. Their
powers and duties are set out in the rules in details.

The act and the procedure also envisage the authority being assisted by the jurisdictional
commissioner and the authorized representatives of the applicants as well as of the
Commissioner after the receipt of an application for seeking advance ruling from the authority.
The role of these functionaries is discussed later.

Who can seek advance ruling

As per section 245N (b) of the IT act, the advance ruling under the income tax act could be
sought by :

(a) A non resident

(b) Resident having transactions with non-residents.
(c) Specified categories of residents.

Such that first category of the resident s per the section 6 of the income tax act. However second
category deals with that a resident can apply in rlation to the tax liability of a non= resident
arising out of a transaction which has been undertaken or is proposed to be undertaken by a
resident applicant with such non resident, however the third category , a resident falling within
any such class or category of a persons as t as the central government may, by notification in the
official gazette specify in this behalf may also apply to advance rulings after the duly obtaining
the permission of the COD. The central govt. specified public sector companies as applicant,
vide its notification. Based on residential status of taxpayer and the place where the income is
erned under the income tax act.

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Authority for Advance Ruling

The scheme of advance rulings was introduced by the Finance Act, 1993, Chapter XIX-B of the
Income-tax Act, which deals with advance rulings, came into force with effect from 1-6-1993.
Under the scheme, the power of giving advance rulings has been entrusted to an independent
adjudicatory body. Accordingly, a high level body headed by a retired judge of the Supreme
Court has been set up. This is empowered to issue rulings, which are binding both on the
Income-tax Department and the applicant. The procedure prescribed is simple, inexpensive,
expeditious and authoritative.

Advance Ruling, means written opinion or authoritative decision by an Authority empowered to

render it with regard to the tax consequences of a transaction or proposed transaction or an
assessment in regard thereto. It has been defined in section 245N(a) of the Income-tax Act, 1961
as amended from time to time. Under section 245N, a ruling can be obtained by an applicant
(who may be either a non-resident or a resident having a transaction with a non-resident) in
respect of any question of law or fact in relation to the tax liability of the non-resident arising out
of a transaction undertaken or proposed to be undertaken.

Advantage under the scheme

Some of the advantages of seeking rulings from the authority are :

1. The non resident investor can be sure of its liability towards income tax even before the
start of investment in India. Hence. It can mould its investment plans accordingly and it
would be able to avoid long drawn litigation.
2. The authority constituted as above, is best suited to sort out complex issues of income tax
including those concerning double taxation avoidance agreements ( DTAA) which arise
as a result of differences of opinion between tax collectors and the tax payers.
3. The public sector companies can take advantage of getting a ruling on questions of facts
or law pending before any tax authority.
4. The rulings of the authority are binding on the applicant as well as the commissioner of
the income tax and authorities below him, not only for one year but for all the years
unless the facts or the law change, therefore, having obtained the ruling on a given set of
facts the tax payer may be sure about his liability in future.

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5. The authority is to pronounce its rulings within six months of the receipt of the
application. This enables the investor to obtain the ruling and draw up the details of his
transaction without undue delay on this account and ensures full certainty regarding its
tax implication.

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CONCLUSION

In the view of complexity of modern tax laws, taxpayers would like to be sure of the tax
implications of their proposed transactions and in that context the facility of advance rulings on
the interpretation of tax laws would go along way in making up their mind for investment in a
particular country. Advance ruling has been internationally recognized as “ a more or less
binding statement from the revenue authorities upon the voluntary request of a private person,
concerning the treatment and consequences of one or a series of contemplated future actions or
transactions. In many ways the advance ruling system in India is unique and far more effective
than in most other countries. In most countries the advance rulings are given by the revenue
officials with different variations of the theme, and these rulings are mostly not binding, as they
are not given by judicial or quasi jus- judicial authority.

In India the authority is a high level qausi judicial and independent statutory body chaired by a
retire judge of the Supreme Court. Since the rulings are binding on the applicant and the income
tax authorities they are quite effective in substantially eliminating long drawn out litigation.

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BIBLIOGRAPHY

1. A.C Sampath Iyengar, The Law of Income Tax (New Delhi: Bharat Law House Private
Limited, 1994).

2. Bhagwati Prasad, Income Tax- Law and Practice (New Delhi: Wishwa Prakashan, 1997).

3. Dr. H.C Mehrotra and Dr. S.P Goyal, Direct Taxes- Law and Practice (Agra: Sahitya Bhavan
Publications, 1995).

4. Dr. Vinod K. Singhania and Kapil Singhania, Direct Taxes- Law and Practice (New Delhi:
Taxmann, 1998).

5. Dr. Vinod K. Singhania and Monica Singhania, Students Guide to Income Tax (New Delhi:
Taxmann, 2003).

6. Girish Ahuja and Dr. Ravi Gupta, Concise Commentary on Income Tax (New Delhi: Bharat
Law House Private Limited, 2003).

7. K. Caturvedi and S.M Pithisaria, Income Tax Law- Volume I (Nagpur: Wadhwa and
Company Law Publishers, 1998).

8. K. Srinivasan, Income Tax Law- Volume I (Bangalore: Bharadwaj Publications, 1962).

9. N.A Palkhivala and B.A Palkhivala, The Law and Practice of Income Tax- Volume I
(Bombay: N.M Tripathi Private Limited, 1990).

10. P.N Bhagwati, Case Book on Income Tax Law (Bombay: N.M Tripathi Private Limited,
1987).

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